Question

You are given the following business case, but not required to solve it for numbers. Instead, please read it carefully and follow the instructions to complete each requirement. Hector P. Wastrel, a careless employee, left some combustible materials near an open flame in Salter Company’s plant. The resulting explosion and fire destroyed the entire plant and administrative office. Justin Quick, the company’s controller, and Constance Trueheart, the operations manager, were able to save only a few bits of information as they escaped from the roaring blaze. “What a disaster,” cried Justin. “And the worst part is that we have no records to use in filing an insurance claim.” “I know,” replied Constance. “I was in the plant when the explosion occurred, and I managed to grab only this brief summary sheet that contains information on one or two of our costs. It says that our direct labor cost this year totaled $180,000 and that we purchased $290,000 in raw materials. But I’m afraid that doesn’t help much; the rest of our records are just ashes.” “Well, not completely,” said Justin. “I was working on the year-to-date income statement when the explosion knocked me out of my chair. I instinctively held onto the page I was working on, and from what I can make our, our sales to date this year totaled $1,200,000 and our gross margin was 50% of sales. Also, I can see that our goods available for sale to consumers totaled $810,000 at cost.” “Maybe we’re not so bad off after all,” exclaimed Constance. “My sheet says that prime cost totaled $410,000 so far this year and that manufacturing overhead is 80% of conversion cost. Now if we just had some information on our beginning inventories.” “Hey, look at this,” cried Justin. “It’s a copy of last year’s annual report, and it shows what our inventories were when this year started. Let’s see, raw materials were $18,000, work in process was $65,000 and finished goods were $45,000. “Super,” yelled Constance. “Let’s go to work.” To file an insurance claim, the company must determine the amount of cost in its inventories as of the date of the fire. You may assume that all materials used in production during the year were direct materials.

1) What happened? Specifically, what accounts are affected? Please use the bulleting points to list your analysis;

2) Please use the graphic organizers, such as flowcharts, to describe how to determine the amount of costs in each accounting with missing data.

?

Answer 1

1.The accounts affected due to the fire were

• RM stock
• Work in progress
• Finished goods available for sale
• The loss includes the expenses such as manufacturing overheads,direct labour employed which in turn is loaded in the Work in process stock and Finished goods stock available for sale

2. The answer for the second sub question is uploaded in the image
To find the Inventories as on that date we need the following data 1. Raw material stock as on that date 2. Work in progress stock as on that date 3. Finished goods as on that date available for sale 1. To find RM stock as on that date : • RM stock as on that date = Opening stock of RM + RM purchased during the year till date - RM consumed during the period 2. So the data which is missing for the purpose of finding out the RM Stock as on that date is RM consumed during the period 3. To find the RM consumed during the period : Prime cost for the period = Direct labour + Direct material consumed during the period 4. As the prime cost and direct labour employed data is available, We can easily find out RM consumed during the period 5. In turn we could find RM stock as on that date by using the above formula 1. To find Work in process(WIP) stock as on that date • Work in process as on that date = Prime cost till date +Manufacturing Overheads till date + Opening stock of WIP - Cost of finished goods manufactured (goods available for sale) 2. In the problem it is given that manufacturing overheads is 80% of conversion cost Conversion cost = Direct labour + Manufacturing overheads 3. Calculation of Manufacturing overheads • Conversion cost = Direct labour +0.8 of Conversion cost • 0.2 of conversion cost = Direct labour • Direct labour as given = 180,000 • Conversion cost = 180,000*1/0.2 • Conversion cost = 900,000 4. Hence by substituting the values found in the above formula could give the work in process

The data of finished goods available for sale is readily available in the question so we can directly proceed to find out total inventories Total inventory as on the date of fire is the sum of above three i.c RM stock as on that date fire + Work in process stock as on the date of fire + Finished goods stock as on that date of fire